2015 Action Required To Maintain Qualified Status Of Prototype Defined Contribution Plans

By: Clayton H. Hale, Jr

Maintaining up to date documentation for your retirement plan is extremely important and not something employers should take lightly.

During a plan audit the first thing the IRS auditor asks for is a signed copy of the Plan Document with all amendments. If these do not contain provisions timely reflecting the latest legislative and/or regulatory changes, the plan faces the possibility of disqualification which can be extremely costly.

Disqualification means that the employer will have to pay tax on all amounts that have been contributed to the plan and the employees are taxed immediately on all vested benefits to which they are entitled under the plan. To avoid such a draconian result, the plan sponsor is permitted to pay a monetary penalty (the amount of which could be substantial) and make remedial amendments correcting deficiencies.

To assure that a plan document properly reflects all the rules required for it to constitute a tax qualified plan the practice is to submit an individually designed plan to the internal revenue service to obtain an IRS Approval Letter at the time of the initial adoption of the plan. If the plan is timely submitted for approval and a disqualifying provision is found by the IRS, a correcting amendment is permitted without penalty. If an employer adopts a prototype or volume submitter plan, the employer relies on the qualification letter obtained by the document provider when the document was drafted.

Because an initial approval letter does not guaranty qualification if subsequent amendments are made to the plan, and because of the frequency of legislative and regulatory changes requiring plan amendments, the Internal Revenue service has adopted a procedure which permits a plan to remain qualified without requesting a new approval letter every time an amendment is made. The procedure requires plan sponsors and/or document providers to adopt “good faith” amendments at the time each new legislative or regulatory change is made and then periodically submit a restated plan incorporating all the interim amendments to the IRS for a new approval letter. Prototype and volume submitter plans must submit their restated plans every six years and individually designed plans must submit their restated plans every five years

Many employers maintaining profit sharing and 401(k) plans have adopted prototype or volume submitter plan documents and have been relying on the plan sponsor to keep the documents up to date. These plan sponsors have submitted restated plans incorporating all amendments required through the end of 2010 and recently received Internal Revenue Service approval of the restated plan documents. According to Internal Revenue Service procedures, as stated in an IRS announcement earlier this year, employers who have previously adopted the plan documents of a particular plan sponsor are required to officially adopt these recently approved plan documents prior to April 30, 2016. In addition, employers who have been relying on the underlying opinion letter of a volume submitter plan and have made significant changes causing the plan to become an individually designed plan must also restate their plan and apply for approval prior to the April 30, 2016 deadline.

Employers should expect to be contacted by the sponsors of their prototype and volume submitter plan documents during 2015 to begin the process of restating their plans for submission to the IRS. Those employers who are not contacted should be proactive and seek help either from the plan sponsor or their attorneys.